What’s happening to the Aussie Dollar?

12 Oct 2018

The Australian dollar has dropped to its lowest levels in two years, with a year-to-date loss of 9% against the US dollar. According to some commentators, the Australian dollar could drop as low as it did during the previous global financial crisis.

One reason being put forward for the fall is the difference between US and Australian interest rates. This is driven by the Reserve Bank of Australia continuing to keep their cash rate at a record low of 1.5 per cent. Meanwhile, the US Federal Reserve keeps raising rates, and the US economy is in growth mode.

Together, this means US interest rates are higher, which attracts money out of Australia into the US.

Others suggest that the ongoing China / US trade dispute has affected Australia’s exports. This seems counter-intuitive, as one would think that this ‘tariff war’ opens up opportunities for Australian exporters, in both the US and China. But the cause would appear to be how the increasing US tariffs are slowing Chinese growth, giving Australia’s mineral and coal exports less opportunities in the Asian market.

The contrast with New Zealand could not be starker. A $5.5 billion Government surplus was announced this week, driven by a high tax take as a result of higher wages, employment, and corporate profits. This surplus is already fuelling requests for increased public sector wages for teachers, and has raised questions as to why the Government imposed the Auckland fuel tax.

Our dollar has also weakened against the US dollar, which has made coming to New Zealand as a tourist more expensive. We have yet to see much impact on primary sector exports. From what I can gather, there has not been an outflow of investors taking their money back to the US. It would appear that the unexpected New Zealand surplus, plus the value of our primary sector exports and expanding tourism, have put New Zealand in a different, more prosperous financial mode than Australia.

But the increased cost of fuel, the additional fuel tax, and the inflationary stimulus that will come from increased wages, will be factors that could drag New Zealand back from the current financial highs.

Our Finance Minister is prudently resisting calls for a big spend of the Government’s current surplus, with the cost of the Mycoplasma bovis response and worsening international trade being cited as reasons to maintain the country’s surplus. The cost of the Government’s programmes will also likely reduce this surplus in the coming year.

The financial balance can quickly change, as New Zealand is very exposed to any tightening of the freedom on international trade; we rely heavily on exports to maintain New Zealand’s financial viability. This is a risk that the Government is very aware of, and is working to alleviate.

The real difference between us and Australia is simply what we sell overseas. We sell a lot of primary produce, and Australia’s wealth comes from minerals and coal. In this climate, we’re safer. But like Australia, New Zealand runs the risk of its economy going into decline in the coming months. Let’s hope that our run of good luck continues.